Download 5. 4 . Technological specialization in China

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Innovation and technological specialization of
Chinese industry and the middle-income trap
Keun Lee
This chapter is based on a presentation made at the MOR conference held in
Hong Kong, early December, 2014, and draws upon Lee and Li (2014) and Lee (2013a).
The author thanks comments by the editors of this volume.
5.1 Introduction
The middle-income trap (MIT) is a situation in which middle-income countries face a
slowdown of growth as they get caught between low-wage manufacturers and highwage innovators because their wage rates are too high to compete with low-wage
exporters and the level of their technological capability is too low to enable them to
compete with advanced countries (Lin 2012; Williamson 2012; World Bank 2010 and
2012; Yusuf and Nabeshima 2009). The risk of the MIT is not limited to the selected
countries but is relevant to many countries in the world. The China Report by the World
Bank (2012) compares the income levels of several countries (compared with that of
the United States) in 1960 with those in 2008. This analysis reveals that at least thirty
countries have fallen into the MIT. Specifically, income growth is more significantly
slowed in upper middle-income countries or in countries with an income level of 20%
to 30% of that of the United States.
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As China increases its economic growth, reaching around 30% of the per capita
income of the United States, it faces the possibility of the so-called middle-income trap,
similar to other middle-income developing economies (Lee 2013a). Several countries
have attained middle-income status but have subsequently failed to achieve highincome status. Examples from Latin America include Brazil and Argentina, whose
growth stalled in the 1980s and 1990s, respectively (Lee and Kim 2009, table 1).
There can be many criteria upon which to judge the possibility of the MIT, and
the difficulty is identifying the effective criteria for the assessment. Thus, being agnostic
about the causes of the MIT, Aiyar et al. (2013) consider as broad a range of factors as
possible, such as demographic conditions; institutions; and industry and trade
structures, including diversification, physical infrastructure, and macro-financial
developments. They test whether each of these is particularly binding for middleincome countries. On the one hand, the literature finds political institution variables,
such as democracy and the rule of law, important for economic growth in general or in
low-income countries but insignificant in middle-income countries (Aiyar et al. 2013;
Huang, Qin, and Xun 2013; Lee and Kim 2009). On the other hand, physical
infrastructure or investment is significant for economic growth in middle-income
countries (Aiyar et al. 2013), but China has been investing heavily in this infrastructure
and can be considered free from shortage of such. Thus, physical infrastructure would
not be an interesting or meaningful criterion to assess the MIT in China.
This study will use innovation as the criterion to assess the possibility of the MIT
in China. Innovation is a significant factor for economic growth in middle-income
countries and particularly relevant for China, but mixed evidence exists that China has
already overcome this constraint or not (Eichengreen, Park, and Shin 2013; Jin and Lee
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2013; Lee 2013a; Lee and Kim 2009; Lee et al. 2013; Sylwester 2000). In particular, this
study pays attention of the emerging pattern of technological specialization in China,
and it addresses the question of whether China is also moving into short-cycle
technology-based sectors, which have been the leading sectors of the past catch-up in
Korea or Taiwan (Lee 2013a).
The next section discusses further why innovation can be a good criterion to
discuss the MIT issue. Then, Sections 5.3 and 5.4 discuss innovation capability and
technological specialization of Chinese industry, respectively. Section 5.5 concludes.
5.2 Why innovation as the criterion to assess
possibility of the MIT in China
This criterion of innovation is most consistent with the original concern expressed by
the term MIT, because numerous studies consider it to occur as middle-income
countries get caught between low-wage manufacturers and high-wage innovators
because their wage rates are too high to compete with low-wage exporters and their
level of technological capability is too low to enable them to compete with advanced
countries (Lin 2012; Williamson 2012; World Bank 2010 and 2012; Yusuf and
Nabeshima 2009). In other words, the MIT phenomenon is a problem of growth
slowdown because of weak innovation.
Also, when countries are divided into income groups, only innovation and higher
education matter for upper middle- and high-income countries, whereas political
institutions and primary and secondary education matter for low- and lower middleincome countries (Lee and Kim 2009). Eichengreen, Park, and Shin (2013) also find
human capital and innovation important, especially tertiary education, for upper
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middle-income countries. Given that China is already an upper middle-income country,
those criteria of higher education and innovation make sense for China.
A World Bank (2005: 11) assessment of the reform decade of the 1990s also
observes that growth-oriented actions, such as technological catch-up and the
encouragement of risk taking, may be needed for faster accumulation and recognizes
technological innovation as one of the most serious bottlenecks of growth in many
countries, especially in the middle-income countries of Latin America. Lee and Mathews
(2010) also compare the East Asian experience with the elements of the Washington
Consensus to argue that the mixed results of the consensus are related to missing or
neglected policies, such as technological policies and revolutions in higher education.
R&D to GDP ratio is one simple criterion to look at countries’ innovation
capabilities. Although one might expect a positive correlation between income levels
and the R&D–GDP ratio, the ratio suddenly becomes flat among middle-income
countries (Lee 2013b), or countries with per capita income between USD 1,000 and USD
10,000. In other words, the ratio does not increase proportionally with per capita
income in this group of countries, suggesting that the flat relationship is a root cause of
the MIT, as noted in Lee (2013a) by the same graph.
A similar conclusion can be derived by examining the number of U.S. patents
filed by countries. In the early 1980s, when the income level of Korea was similar to
those of Brazil and Argentina, the number of U.S. patent applications by Koreans was
approximately fifty, within the range of other middle-income countries, such as Brazil
and Argentina (Lee and Kim 2009; table 1). In the 1980s and 1990s, Korean
applications increased rapidly to more than ten times the average of other middleincome countries where incomes remained relatively flat. In 2000, Korea and Taiwan
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filed approximately 5,000 U.S. patent applications, whereas other middle- or lowerincome countries, including Brazil and Argentina, filed less than 500 per year (Lee and
Kim 2009). In other words, the difference between the more successful Asian
economies and the less successful Latin American economies (or the reversal of fortune
between these two groups of countries) can be explained by the amount of priority
given to the enhancement of long-term growth potentials, particularly innovation
capability (Lee 2013a; Lee and Kim 2009).
5.3 Innovation capability of China
As stated in the preceding sections, one criterion in assessing the ability of a country to
move beyond the MIT is whether the country is sufficiently innovative to achieve a
certain level of technological capability backed up by an adequate emphasis on higher
or tertiary education. In general, our answer to this question is that China appears to be
performing well.
In this regard, literature has already noted several unique features of Chinese
industry and firms in building technological capabilities and promoting industrial
development. Lee et al. (Lee, Jee, and Eun 2011; Lee et al. 2013) note that unique
Chinese features include the following three elements: (1) parallel learning from foreign
direct investment (FDI) firms to promote indigenous companies; (2) an emphasis on
“forward engineering” (the function of university spin-off firms) in contrast to the
reverse engineering of Korea and Taiwan; (3) the acquisition of technology and brands
via international mergers and acquisitions. These three elements may be regarded as
comprising the Beijing model because they have not been explicitly adopted by Korea
and Taiwan (Lee, Jee, and Eun 2011).
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Although the above is a qualitative account of China’s success in technological
learning and upgrading, many quantitative indications are also available as discussed in
what follows. First, we can consider the ratio of R&D to GDP, a basic measure of the
innovation efforts of a country. Lee (2010) observes that China has strongly been
pushing for considerable R&D expenditure and thus surpassed the 1% threshold ratio
of R&D to GDP in 2000, earlier than the majority of middle-income countries in Latin
America did. The spending of China on R&D as a percentage of GDP, known as R&D
intensity, has more than doubled from 0.6% in 1995 to over 1.3% in 2003. This increase
has accelerated since the 2000s and is now close to 2.0%. Actually, China is an outlier
among middle-income countries with a high ratio of R&D to GDP.
Because of this massive investment in R&D, China has rapidly increased its flow
of patents. The average growth rate of domestic invention patenting has increased, from
approximately 17% in the earlier period to approximately 49% in the later period (Lee
2010, table 4), with approximately 5,000 patents registered in early 2000 to more than
20,000 in the late 2000s. The number of patent applications abroad (particularly in the
United States) has also increased. The number of U.S. patents filed by China reached
more than 2,500 in 2010, greater than that of U.S. patents filed by other middle-income
countries (less than 300 patents per year) (Table 5.1). In terms of the growth rate of
patents, China ranked first in the world in the 2000s, whereas Korea dominated in the
1990s.
Begin Table 5.1
Table 5.1
U.S. patents granted to selected countries (1981–2010)
Country
1981
1985
1990
1995
2000
2005
2008
2009
2010
USA
39,218
39,556
47,391
55,739
85,068
74,637
77,502
82,382
107,792
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Japan
8,389
12,746
19,525
21,764
31,295
30,341
33,682
35,501
44,814
Germany
6,304
6,718
7,614
6,600
10,235
9,011
8,914
9,000
12,363
Taiwan
80
174
732
1,620
4,667
5,118
6,339
6,642
8,238
Korea
17
41
225
1,161
3,314
4,352
7,548
8,762
11,671
China
2
1
47
62
119
402
1,225
1,655
2,657
India
6
10
23
37
131
384
634
679
1,098
Brazil
23
30
41
63
98
77
101
103
175
Malaysia
1
3
3
7
42
88
152
158
202
Source: The United States Patent and Trademark Office(USPTO). Table 8.3 of Lee,
2013a.
End Table 5.1
Another important comparative criterion is whether China measures up to the
three important yardsticks of technological catch-up (Lee and Kim 2010) followed by
Japan, Korea, and Taiwan in the past: (a) whether resident patenting catches up with
nonresident patenting in a host country, (b) whether regular invention patents catch up
with utility model patents (petite patents), and (c) whether corporate patenting catches
up with individual inventor patenting. Lee (2010) highlights that all these three
patterns of catch-up were observed in China in the mid 2000s. In terms of the number
of patent applications in China, the share of domestic inventors outgrew that of
foreigners in 2003, with domestic inventors filing more than 50,000 applications. In
2004, the number of regular invention patents exceeded that of utility model patents. In
2007, the number of patent applications by corporations exceeded that of applications
by individual inventors, signifying the growing importance of corporate innovation.
While these are achievements in terms of domestic patents filed in China, the vast bulk
of Chinese USPTO patents are owned by foreign firms, which should be the area China
must try to improve.
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5.4 Technological specialization in China
As the last but probably the most important indicator of the technological strength of
China, let us turn to technological specialization. According to Lee (2013a),
technological specialization matters more for countries at the middle-income stage,
whereas the traditional trade-based specialization, following the resource-based factor
intensity, is relevant from the low- to the middle-income stage.
Technological specialization can be measured by the cycle time of technologies
shown by patent portfolio of countries (Lee 2013a). “Cycle time” refers to the speed
with which technologies change or become obsolete over time and the speed and
frequency at which new technologies emerge (Lee 2013a; Park and Lee 2006). A
technology-based sector with short cycle time relies less on existing technologies and
can thus leverage the great opportunities brought by new technologies. Lee (2013a)
argues that qualified latecomers have great advantages in targeting technological
sectors with short cycle time and specializing in these sectors because a short cycle of
technologies implies that dominance by the incumbent is often disrupted and that new
technologies always present new opportunities. Minimal reliance on existing
technologies indicates low entry barriers and high profitability associated with few
collisions with the technologies of advanced countries, minimal royalty payments, and
even first- or fast-mover advantages or product differentiation (Lee 2013a).1
Thus, combined with the new structural economics idea of the “growth
identification and facilitation” framework of Lin (Chapter 2 in this volume; 2012), the
Of course, other aspects of the technological regime must also be considered;
for example, while corporate software is a short-cycle technology, it corresponds to a
higher degree of network effects and cumulativeness which make it difficult to enter for
latecomer firms.
1
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idea of technological specialization may provide a comprehensive policy framework for
economic growth of developing countries. Lin (Chapter 2 in this volume) advises
latecomers to closely observe the countries slightly ahead of them, and then to target
the mature industries in those countries as their latent comparative advantages. While
such recommendations are an effective and practical guide for sectoral targeting for
those developing countries, in particular at lower-income stages, this, a more
theoretical, argument for technology-based specialization works better for upper
middle-income countries. In other words, after a developing country makes some
success with inheriting mature sectors from countries above them, it may then be
advised also to try to enter sectors based on shorter-cycle technology or even to take
the risk of leapfrogging into new or emerging sectors. Of course, the whole process
should be a gradual movement into shorter-cycle sectors involving multiple stages. So,
the point is that sustained catching-up growth requires not only an entrance into
mature industries (which are still new to the latecomers), but also leapfrogging into
emerging industries that are new to both the advanced and developing countries.
Technological development in Korea (Lee 2013a) shows the increasing
specialization of Korean industries based on short cycle time. The Korean economy
began with labor-intensive (long-cycle technology) industries, such as apparel or shoe
industries, in the 1960s. The economy then moved toward the short- or medium-cycle
sectors of low-end consumer electronics and automobile assemblies in the 1970s and
1980s and then even further to the shorter-cycle sectors of telecommunication
equipment (telephone switches) since the late 1980s, and then memory chips, cell
phones, and digital TVs in the 1990s. Korean industries have kept moving into shortercycle technologies and have thus achieved technological diversification.
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Figure 5.1 shows the actual trends in the cycle time of technologies as calculated
following U.S. patents jointly held by Korea and Taiwan and those held by China. The
numbers in the vertical axis represent the average cycle time of patents held by the
economies, defined by Jaffe and Trajtenberg (2002) as the mean backward citation lags,
namely, the time difference between the application or grant year of the citing patent
and that of the cited patents. For example, a value of eight on the vertical axis indicates
that the average cycle time of patents is eight years, indicating, for instance, that Korea
and Taiwan jointly cite eight-year-old patents on average. Since the mid 1980s, both
catching-up economies have traveled in a path toward technologies with an increasingly
short cycle time. Thus, the average cycle time of the patents held by Korea and Taiwan
became shorter, reaching six to seven years by the late 1990s. This duration is two to
three years shorter than the average cycle time of the patents held by European G5
countries whose cycle time has ranged from nine to ten years since the late 1980s.
Consequently, Korea and Taiwan have a completely different patent portfolio from
those of other advanced countries (Lee 2013a). Therefore, we consider the mid 1980s
as an important turning point that opened a path for sustained catch-up beyond the
middle-income stage. In this period, Taiwan and Korea reached the middle-income
level: the per capita GDP of Korea became 25% of that of the United States, and Korea
and Taiwan increased their R&D expenditure, with their R&D–GDP ratio averaging
more than 1% annually. Thus, when these countries decisively began the journey
toward more technology-based growth, the cycle time of their technologies moved in
progressively shorter directions, such as various IT products.
However, after they achieved technological catch-up, the next stage for maturing
of specialization should occur. Actually, Figure 5.1 shows that only in the 2000s, when
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Korea and Taiwan became more mature economies, their technologies turned in the
opposite direction toward long cycles. Lee (2013a) refers to this strategy of
technological specialization in short-cycle technologies during the catching-up period as
a “detour” because developing countries do not directly and immediately replicate the
path and industries of advanced economies that specialize in long-cycle technologies.
Instead, countries that are successful at catching up have moved initially in the opposite
direction progressively toward a sector with short-cycle technologies. However, as the
countries reach the point of technological maturity (as many did in the early 2000s),
their success enables them to adopt long-cycle technologies, such as biomedical or
pharmaceutical industries.
Begin Figure 5.1
Figure 5.1
Cycle time of technology shown in U.S. patents by China and Korea/Taiwan
Source: Author’s calculation according to method used by Lee, 2013a.
End Figure 5.1
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Therefore, an interesting measure of the prospects of a country beyond the
middle-income stage is whether it has reached such a “technological turning point” and
has switched from long cycles to short ones along the curve of the cycle time of
technologies. Figure 5.1, based on Lee (2013a), shows that China passed such a turning
point in the middle to late 1990s, approximately ten to fifteen years later than Korea.
The top thirty technologies in the U.S. patents of China (Lee 2013a, table 8.4) are similar
to those of Korea and Taiwan from 1980 to 1995. The Chinese hold several patents for
semiconductors, information storage, telecommunications, electrical lighting, electrical
heating, X-rays, and computer hardware and software. The weighted average cycle time
of Chinese technology from 2000 to 2005 was 8.07 years, closer to the
Korean/Taiwanese average of 7.69 from 1980 to 1995 than to the
Brazilian/Argentinean average of 9.26 in the same period (Lee 2013a).
In sum, the short cycle time of technologies of the U.S. patents held by China and
its turning point in the late 1990s can be regarded as additional evidence of the
progress of the country in terms of innovation. Jin, Lee, and Kim (2008) and Jin and Lee
(2013) also show that the growth engines of China have shifted from FDI,
denationalization, and exports to innovation and exports. Cross-province regressions
reveal that whereas exports, FDI, and the reduction of the state sector were the
important growth engines during the early period, knowledge and innovation have
become more important in the recent period and that, among traditional policy
variables, shares in exports remain significant, but shares in foreign capital and state
ownership have been insignificant to economic growth.
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5.5 Concluding remarks
This chapter discusses the possibility of China falling into the so-called MIT in terms of
innovation capability, especially its technological specialization into short- or long-cycle
sectors. The conclusion is that China has increasingly become innovative and thus
differs from other middle-income countries. So, China is not likely to be falling into the
MIT at least from the innovation point of view. In terms of technological specialization,
China has already passed the “technological turning point” by increasingly moving into
short-cycle technology-based sectors. Lee (2013a) shows that China passed such a
turning point in the middle to late 1990s, approximately ten to fifteen years later than
Korea or Taiwan.
The next issue will be when China will pass the second technological turning
point of moving back into the long-cycle technology-based sectors. In the case of smaller
economies, like Korea, this second turning point came in the early 2000s. One can
expect a giant economy like China to show a more balanced pattern of specialization at
an earlier stage or in a shorter period of time after the first turning point. Verification of
this conjecture can be done by updating the trend of the average cycle time using the
more recent portfolio of the Chinese-held patents. If one can find a new trend that the
average cycle time of the Chinese-owned patents are getting longer, for instance, by the
increase of patents in biomedical industries, that may be a signal of the arrival of the
second turning point of China’s technological specialization. There are some signs that
this is happening actually, as we are now witnessing the rise of successful companies in
diverse fields, including Beijing Genomics Institute(BGI) in biotechnologies. Given that
long-cycle sectors may require a longer time to achieve some results, different policy
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approaches, different from the traditional supply-side-oriented targeting, may be
needed. This issue can be a topic for future research.
chapter-references
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